PMA1123 | Introduction to Cost Accounting Session: July 2023
Chapter 3
ACCOUNTING FOR LABOUR
LEARNING OUTCOMES
Upon completing this chapter, students should be able to:
➔ Define and classify labour.
➔ Explain recording control of labour costs.
➔ Calculate remuneration using time based and piecework system.
➔ Calculate bonus and idle time.
➔ Explain labour productivity and calculate labour turnover.
40
PMA1123 | Introduction to Cost Accounting Session: July 2023
Introduction to labour
The work performed of all human physical and mental effort used in the creation of goods and
services. Labour is a person who responsible in changing the materials into product. Labour
cost is a wage or an amount of money paid to worker during an accounting period on job
basis and any benefits bourned by the employer.
Total labour cost can be classified into (CIMA):
Direct labour cost
Relates to the cost of remuneration for employees efforts and skills applied directly to a
product or service
Indirect labour cost
Wages cost other than direct wages.
For cost accounting purposes, direct labour cost is classified as prime costs and indirect labour
cost as production overheads. The classification of labour costs is important:
• for measuring labour efficiency
• determining accurate product costs
• preparing labour cost control analysis
Employers can plan and control both the production levels and labour efficiency to achieve
their cost objectives. Typically, production workers are paid remuneration by some form of
variable incentive schemes, but supervisors’ salaries are generally fixed. As production
workers are mostly paid on an incentive-based scheme, an organization can plan to reduce
its unit product cost by raising production levels by way of improving labour efficiency. In order
to ensure improved efficiency, employers need to have an attractive remuneration system that
complies with relevant laws of the country.
A good remuneration system should consider the following:
• Established a simple remuneration system that is easy to administer.
• Motivate employees to be productive.
• Reward and retain efficient employees.
• Attract potential employees to work in the organization.
41
PMA1123 | Introduction to Cost Accounting Session: July 2023
Recording and control of labour costs
The recording and control of labour cost involve several activities and departments. The
activities include the recruitment, training, recording and costing of labour. The departments
involved in these activities include the following:
a. Human Resource (HR) department
b. Timekeeping department
c. Cost accounting department
Human Resource (HR) department
The human resource (HR) department’s roles include:
• The recruitment of suitable candidates for the organization.
• Preparing the payroll for the employees.
• Designing a suitable remuneration package.
• Identifying and meeting the training needs of existing staff.
• Ensuring employee welfare and a safe working environment for employees.
Timekeeping department
Timekeeping is the process of recording employee work time. The timekeeping department is
responsible for recording:
• Employee attendance
• The time spent by each employee in the factory and/or on each job
The attendance time and the time spent in the factory provide the basic input for the
preparation of the payroll, and developing the cost accounting and control procedures.
It is necessary to record labour employee work time so that accurate date is available for the
following reasons:
• to calculate wages
• to analyze the times spent for costing purposes
• for planning and control purposes
The following methods are used for recording labour times:
Time sheets: These are completed by an employee. He records the time spent on each job.
The time sheets are completed and sent to the cost department daily or weekly.
42
PMA1123 | Introduction to Cost Accounting Session: July 2023
Figure 3.1: Example of time sheet
Job cards: They are cards completed by an employee who records the time spent on a
particular job.
Figure 3.2: Example of job card
43
PMA1123 | Introduction to Cost Accounting Session: July 2023
Job tickets: A card that is made out for each operation within a single job.
Figure 3.3: Example of job ticket
Cost accounting department
The primary purpose of cost accounting is to ascertain cost which includes labour cost. Labour
cost is ascertained by maintaining a job cost card for each job. A job card can be created for
each worker or for each job. The details of the labour time spent in each job and the agreed
wage rate provides the basis for the calculation of labour costs for each job. If an employee
due to no fault of his unoccupied for certain period of time, then an idle time report should be
recorded and attached with the time sheet.
Remuneration methods
The labour remuneration method a firm adopts has a direct impact on the cost of the finished
product, and the morale and productivity of workers. Typically, there are three groups of
remunerations methods commonly adopted by organizations:
a. Time-based schemes
b. Piecework schemes
c. Bonus/incentive schemes
Time-based schemes - Day Rate System
The simplest form of a time-based remuneration scheme is a day rate system. In a day rate
system, workers would be paid for the number of hours worked at a basic rate per hour. The
day rate system is the most appropriate as quality of output is more important than the quantity
of output.
44
PMA1123 | Introduction to Cost Accounting Session: July 2023
Gross wage = Hours worked x Rate per hour
Example:
Employee A worked 40 hours in the first week of January. The rate per hour is RM4.00. What
will his gross wage be?
Solution:
Gross wage = Hours worked x Rate per hour
= 40 x RM4.00
= RM160
Overtime
Overtime is time worked over and above the normal working time.
OT hours = Actual hours worked – normal working hours
There is gradual increment in payment of overtime. The longer the person worked, more
overtime pay is being paid per hour. Overtime can be categorized as basic overtime and
premium overtime. Basic overtime is treated as direct cost whilst premium overtime is
classified as indirect cost (for mass production or general production). However, if the
employees are required to do extra work to finish a particular or specific product or job, then
overtime premium is classified as direct cost.
Presently, the overtime rates set by the Employment Act in Malaysia are as follows:
• 1.5 times for weekdays
• 2 times for weekend
• 3 times for public holiday
• However, a company may set their own policy on the overtime rate but subject to the
provision it should not be below the rate under the Employment Act.
OT pay = OT hours x OT rate x rate per hour
The overtime rate for basic is always at one while the balance will be for premium.
Example:
Overtime rate is 1.5
Basic overtime is 1
Therefore, premium overtime is 0.5 (1.5 – 1)
45
PMA1123 | Introduction to Cost Accounting Session: July 2023
Rate per hour is RM3.00. Actual hours worked is 45 hours. Normal working hours is 40 hours.
How much is the total overtime pay?
Solution:
Basic OT = OT hours x OT rate x rate per hour
= 5 hours x 1 x RM3.00 RM15.00
Premium OT = 5 hours x 0.5 x RM3.00 RM07.50
Total OT RM22.50
If the premium rate is given, the employees will get an additional rate and therefore, he will be
paid above the usual overtime rate.
Example:
Overtime premium rate is 1.5
Basic overtime is 1
Therefore, overtime rate is 2.5 (1.5 + 1)
Rate per hour is RM3.00. Actual hours worked is 45 hours. Normal working hours is 40 hours.
How much is the total overtime pay?
Solution:
Basic OT = OT hours x OT rate x rate per hour
= 5 hours x 1 x RM3.00 RM15.00
Premium OT = 5 hours x 1.5 x RM3.00 RM22.50
Total OT RM37.50
Advantages of the day rate system
i. It is easy to understand and administer.
ii. It does not involve any complex wage negotiations when rates are revised.
Disadvantages of the day rate system
i. There is no real incentive to increase the production output.
ii. Employees, regardless of their performance, are all paid the same basic rate.
iii. High supervision cost is necessary to ensure that workers perform as planned.
46
PMA1123 | Introduction to Cost Accounting Session: July 2023
Piece rate/Piecework systems
For a piece rate system, the wages are paid on the basis of the output produced by each
worker. An employee earns more if he produces more and earns less if he produces less.
Straight piece rate
A straight or fixed piece rate is paid for each output produced by a worker at flat rate.
Gross wage = Units produced x Rate per unit
Example:
ZEE Sdn Bhd pays a piece rate of RM2.00 for each output produced. Employee A completes
85 units per week. What will his gross wage be?
Solution:
Gross wage = Units produced x Rate per unit
= 85 x RM2.00
= RM170
Differential piece rate
A differential piece rate is where different wage rates are applicable for different levels of
production.
Example:
Fay Sdn Bhd pays its production worker a differential piece rate. The rate is as follows:
Up to 100 units per week RM2.00 per unit
101 – 150 units per week RM2.10 per unit
151 – 200 units per week RM2.25 per unit
In a typical week, Employee A completes 155 units. What will his gross wage be?
Solution:
Gross wage = Units produced x Rate per unit
First 100 units = 100 x RM2.00 RM200.00
Next 50 units = 50 x RM2.10 RM105.00
Next 5 units = 5 x RM2.25 RM011.25
Total weekly wages RM316.25
47
PMA1123 | Introduction to Cost Accounting Session: July 2023
Piecework with guaranteed day rate
This method guarantees a day rate. If the piece rate earnings fall below the day rate earnings,
the day rate earnings are paid instead. Therefore, workers are paid a guaranteed minimum
and not penalized on account of low production through circumstances (say, poor materials)
beyond their control.
Example:
Employee A produces 38 units per day. He will be paid a guaranteed minimum of RM40.00
daily if output falls below 40 units per day. The rate per unit is RM1.00. What will be his wage
if he produces below 40 units? What will be his wage if he produces 45 units per day?
Solution:
Situation 1:
Gross wage (straight piece rate) = Units produced x Rate per unit
= 38 x RM1.00
= RM38
Guaranteed minimum wage = RM40
Employee A gross wage is RM40 because the guaranteed minimum wage is higher than
using straight piece rate.
Situation 2:
Gross wage (straight piece rate) = Units produced x Rate per unit
= 45 x RM1.00
= RM45
Guaranteed minimum wage = RM40
Employee A gross wage is RM45 because the straight piece rate wage is higher than the
guaranteed minimum wage.
Advantages of the piecework system
i. Workers are rewarded based on their productivity. This is to ensure a clear distinction
between efficient and inefficient workers.
ii. Increased productivity will reduced fixed overhead costs per unit.
iii. As wages are paid on the basis of output, there is little idle time recorded.
48
PMA1123 | Introduction to Cost Accounting Session: July 2023
Disadvantages of the piecework system
i. It is difficult to establish the suitable piece rate. If the piece rate is low, employees will be
demotivated to perform.
ii. The quality of output may be affected if employees focus on quantity rather than quality.
Bonus/Incentive schemes (Individual/group bonus scheme)
The main aim of bonus/incentive scheme is to increase labour efficiency and in doing so,
reduce the unit cost of a product. Various types of bonus and incentive schemes have been
introduced to encourage greater productivity. The key features of such schemes are:
• Employees are rewarded for their efficiency.
• The savings or profits from increased productivity are shared between employer and
employee.
• Employees are motivated when their efforts are duly recognized and rewarded by their
employers.
Individual bonus scheme
Under such schemes a time allowance is set for a job. Bonus is paid on the basis of time
saved. Time saved is the difference between the time allowed for the job and the time taken.
The employee will still be paid for the basic hours worked plus a proportion of the time saved.
Example 1:
The details below relate to Employee A on Job No. 10:
Direct wage rate per hour RM6.00
Time allowed 30 hours
Time taken 20 hours
Calculate the basic pay, the bonus paid at 50% of time saved and the total pay.
Solution:
Basic pay = 20 hours x RM6.00 RM120.00
Bonus pay = 50% x (30 hours – 20 hours) x RM6.00 RM030.00
Total pay RM150.00
Example 2:
The following data relates to Hay Sdn Bhd:
Normal working hours per day 8
Basic labour rate per hour RM5.00
Standard time allowed to produce 1 unit 2.5 minutes
49
PMA1123 | Introduction to Cost Accounting Session: July 2023
Premium bonus of time saved at basic rate 75%
What is the total pay if 240 units are produced?
Solution:
Standard time for 240 units 240 x (2.5 ÷ 60) 10 hours
(-) Actual time 08 hours
Time saved 02 hours
Basic pay = 8 hours x RM5.00 RM40.00
Bonus pay = 75% x 2 hours x RM5.00 RM07.50
Total pay RM47.50
Group bonus scheme
A group bonus scheme is an incentive plan that relates to the performance of a group of
workers, a department or even the whole factory. The incentive is often related to the output
performance of the group members. Group bonus scheme is paid when individual efforts
cannot be measured and when teamwork is compulsory.
Example:
The standard production for Uno Sdn Bhd is 24 units per day. A group of 10 employees work
on the assembly line. For every 20% increase in production, the group will be entitled to share
a bonus RM60.00 equally. On day 13, 30 units were produced. How much will each member
of the group receive?
Solution:
Increase in production = [(30 – 24) ÷ 24] x 100
= 25%
Group bonus = RM60 x 1.25
= RM75
Each member bonus = RM75 ÷ 10 members
= RM7.50
50
PMA1123 | Introduction to Cost Accounting Session: July 2023
Idle time
Idle time may be caused by a number of reasons, including:
• Machine breakdown
• Waiting for work
• Inefficiency
• Material shortages
Idle time is usually recorded on an idle time card that also indicates the reasons for idle time.
Wages paid for unproductive time is treated as production overhead.
Example:
A machine operator’s machine break down for four hours. The total time is forty-four hours
including four hours idle time. The rate is RM1.00 per hour. What will his gross wage be?
Solution:
Direct wage = 40 hours x RM1.00 RM40.00
Idle time = 4 hours x RM1.00 RM04.00
Gross wage RM44.00
In incentive schemes, the idle time due to reason beyond the worker’s control is excluded from
the calculation of bonuses because he is paid the time or work rate/day rate for unproductive
work. Idle time reports should be prepared showing an analysis of the time lost by departments
and by causes, and the cost of idle time.
Labour productivity and labour turnover
Labour productivity
Labour productivity is a measure of efficiency and indicates an organization’s effectiveness of
utilizing its labour force. Cost reduction can be achieved through improved productivity. In
other words, total unit cost can be reduced with improved productivity.
Labour turnover
Labour turnover is the rate at which employees leave a company during a period and are being
replaced. The more workers that leave the company, the higher is the labour turnover.
51
PMA1123 | Introduction to Cost Accounting Session: July 2023
Reasons for labour turnover
Unavoidable causes:
• Illness, accident, retirement or death
• Family relocating
• Marriage, pregnancy, childcare problems
Avoidable causes:
• Low wage rate compared to market
• Unsafe working conditions
• Long working hours
• Conflicts with management
• Lack of opportunity for career enhancement
Costs of labour turnover
Preventive costs:
• Cost of medical benefits
• Providing security for employees such as pension schemes
• Social welfare benefits such as canteen and sports facilities
• Personnel administration costs incurred for maintaining a cordial relationship with
employees
Replacements costs:
• Costs of recruitment, training, etc.
• Loss of productivity during the period between the leaving of the employee and
the replacement of a new employee
• Increased wastage and spoilage due to lack of expertise among new employees
Labour turnover = *Average no. of employees left during a period
x 100
**Average total no. of employees during the period
*Average no. of employees left = No. of employees left + No. of employees replaced
2
**Average total no. of employees = No. of employees beginning + No. of employees ending
2
52
PMA1123 | Introduction to Cost Accounting Session: July 2023
Example:
The payroll record of a company showed 110 employees at the beginning of the year. At the
end of the year, the number of employees being employed was 120. During the year, 8
employees resigned and need for replacement in order to avoid any disruption to the
production. The industry labour turnover ratio is 15%.
Solution:
*Average no. of employees left = No. of employees left + No. of employees replaced
2
= 8 + *18 *120-110+8
2
= 13
**Average total no. of employees = No. of employees beginning + No. of employees ending
2
= 110 + 120
2
= 115
Labour turnover = *Average no. of employees left during a period
x 100
**Average total no. of employees during the period
= 13
x 100
115
= 11.30%
The industry labour turnover ratio is 15%. For comparison purposes, the labour turnover of
the company is quite good since it is below the industry ratio.
53
PMA1123 | Introduction to Cost Accounting Session: July 2023
TUTORIAL
Question 1
Why it is necessary to record labour time?
Question 2
State TWO (2) advantages of each time-based system and piecework system of remuneration.
Question 3
Give TWO (2) reasons for idle time.
Question 4
Define labour turnover. What are the costs associated with labour turnover?
Question 5
Standard production time for 6 units of hard disk chips is 10 minutes. The rate per hour is
RM4.00. Mr. Donald is producing 3,000 units of hard disk chips per month. What is the monthly
gross wages for Mr. Donald?
Question 6
Employees Output (units) Hours worked
Operator M 440 40
Operator N 400 35
Operator O 450 40
Operator P 410 42
Rate per minute is RM0.025. The time taken to produce one unit is 6 minutes.
Required:
Calculate the rate per hour, rate per unit, the guaranteed minimum wages and the gross
wages. Determine the wages each operator will receive.
Question 7
The Manufacturing Department of Alfa Best Sdn Bhd has three workers; Abi, Abas and Adi.
The following information relates to the performance of each worker in that department for the
first week of December. Abi is a skilled worker, while Abas is a semi-skilled worker and Adi is
an unskilled worker.
54
PMA1123 | Introduction to Cost Accounting Session: July 2023
Worker Actual Output Standard Rate Actual hours Rate per hour
per unit Worked
ABI 250 RM2.50 40 RM15
ABAS 230 RM2.30 43 RM11
ADI 200 RM2.00 49 RM9
The normal working hour for the business is 8 hours a day for five days. Each worker is eligible
for overtime. The overtime premium is 50% of hourly rate.
Required:
Calculate the wages paid to each worker using remuneration method;
a. Time Based System (includes overtime)
b. Piece Work System (straight piecework)
Question 8
The Kedondong Sdn Bhd has skilled and unskilled workers. Unskilled workers are paid on
output while skilled workers are paid on hours worked. Unskilled workers are entitled for a
guaranteed minimum wage of RM1,100 per week. Below are the data for the five workers of
the company in the first week of January;
Employee Type Hours Units produced Units rejected
worked Product P Product C Product P Product C
Hafis Skilled 45 300 200 5 10
Junaidi Skilled 40 250 100 8 9
Rahmat Skilled 43 150 180 7 9
Salem Unskilled 38 140 110 10 15
Tom Unskilled 40 100 120 10 15
Additional information:
i. Rate per hour is standardized at RM35 per hour. Overtime is paid at a premium of one
and half of the normal rate. Normal working hour is 40 hours.
ii. Rate for a good unit is RM6 for Product P and RM5 for Product C.
Required:
Compute gross wages paid for each worker for the first week of January.
55
PMA1123 | Introduction to Cost Accounting Session: July 2023
Question 9
The Melur Mewangi Sdn Bhd hires two unskilled worker, Daud and Dell. They are paid based
on differential piece rates. For the first week, Daud produced 250 units of output while Dell
produced 145 units. The scheme of differential piece rates is as follows;
Unit RM
Up to 50 1.50/unit
51 to 100 2.00/unit
101 to 150 2.50/unit
151 and Above 3.00/unit
Required:
Calculate the gross pay for Daud and Dell according to differential piece rates with guaranteed
minimum wage of RM300 per week.
Question 10
The following information is available:
Normal working day (hours) 8 hours
Guaranteed rate of pay (on time basis) RM5.50 per hour
Standard time allowed to produce 1 unit 3 minutes
Piecework price RM0.10 per standard minute
Required:
For the following levels of output produced in one day: 80 units
120 units
210 units
Calculate earnings based on piecework system, where earnings are guaranteed at 80% of
time-based pay.
Question 11
Zaki is paid by differential piecework. The scheme is as follows:
Up to 50 units per day RM0.50 per unit
51 – 70 units per day RM0.60 per unit
71 – 80 units per day RM0.65 per unit
81 – 100 units per day RM0.70 per unit
His daily outputs for five-day week were 68 units, 83 unit, 59 units, 94 units and 47 units.
56
PMA1123 | Introduction to Cost Accounting Session: July 2023
Required:
What will be his gross pay for the week?
Question 12
The standard production of Product X is five unit per hour. Output is calculated weekly and
operators are paid a bonus 50% of the time they have saved at their time rate. During a certain
week, the relevant figures for three operators were:
Operator A Operator B Operator C
Hours worked 40 42 38
Output 220 240 180
Hourly rate RM7.00 RM7.00 RM6.00
Required:
Calculate for each of the operators:
i. Basic wage
ii. Bonus
iii. Gross wage
Question 13
High Impact Technology Sdn Bhd is a microchip supplier. Recently, the company is awarded
tender to produce chips for mobile phones. The production manager urged workers to work
extra hours in order to meet the customer order. Below is the data for three workers; Armand,
Basha and Tommy who works in the quality control department.
The actual hours worked per week for Armand is 42 hours, Basha is 44 hours and Tommy is
45 hours. The normal working hours per week is 40 hours. The fixed hourly pay for every
worker is at RM7.50. Both Armand and Tommy are paid overtime at a premium rate of 150%
while Basha is paid at overtime rate 1.5.
Required:
Calculate for each employee the following:
i. Basic pay
ii. Overtime pay (differentiate between basic and premium overtime)
Question 14
Dotcom Sdn Bhd is a microchip supplier proposing to change their current labour scheme from
time based to piecework with guaranteed minimum of 85% of the basic pay. The normal
working hour per week is 40 hours. The fixed hourly pay for every worker is at RM7.50 and
57
PMA1123 | Introduction to Cost Accounting Session: July 2023
any overtime is paid at a premium of 150% of the normal hourly rate.
The first week of April shows the following data:
Aliff Baba Tata
Actual hours worked 42 40 37
Output M (units) 384 60 24
Output A (units) 42 240 -
Output E (units) 160 10 560
The standard time allowed for each output M, A and E are 5, 10 and 3 minutes respectively
with each standard hours being paid at the normal hourly rate. Bonus is paid 40% of the hourly
rate of pay.
Required:
a. Calculate for each employee under current labour scheme:
i. Basic pay
ii. Overtime pay (differentiate between basic and premium overtime)
iii. Bonus
iv. Total pay
b. Calculate total pay for each employee under the proposed scheme.
58
